Draghi Says EU Bank Resolution Fund Needed With Power to Borrow

The European Union needs a bank resolution fund that can borrow money if needed as it’s gradually filled by contributions from the financial-services sector, European Central Bank President Mario Draghi said.

Draghi said the EU should press ahead with plans to create a Single Resolution Mechanism to step in when banks fail. He endorsed European Commission plans for a single system with centralized powers and a joint fund.

In the short run, national authorities will need to stand ready to finance the cost of stabilizing a failing bank, Draghi said. The ECB will be conducting balance sheet reviews of lenders across the euro zone as it prepares to become the currency bloc’s single supervisor next year, and the results of those reviews will require some sort of backstop.

“We’ll have to have national backstops in place,” Draghi told a European Parliament panel in Brussels today. “The role for the national backstops is there and it’s realistic.”

Current plans call for the Single Resolution Mechanism to start on Jan. 1, 2015, and build up its fund over 10 years. Draghi said it would be better if the fund could ramp up more quickly. Otherwise it will be up to national authorities to act when needed, which is “suboptimal,” he said.

Draghi said the ECB can make an assessment of when a bank should enter resolution and should then remain an “observer” for what happens next. “The ECB should not and will not have anything to do with this fund,” he said.

Credit Line

The resolution authority and national governments will have to decide whether to prop a bank up or shut it down, Draghi said. The costs of that decision should be handled by the central fund, which should have access to a credit line for short-term cash, he said.

Draghi stressed that the fund would need “not money for free, but to borrow money” that could later be repaid as the fund is filled with industry fees. He said it’s too early to say where the fund’s credit line should come from or whether it could tap the euro area’s firewall fund, the 500 billion-euro ($674 billion) European Stability Mechanism.

“Some people have suggested the ESM could extend a credit line to the resolution fund,” Draghi said. “I am not sure that this is possible within the existing treaty.”

Draghi said the ECB would offer more details by mid-October on its forthcoming reviews of euro-area lenders. The central bank has begun the process of hiring outside firms to help, at the ECB and at the national level, he said.

“The asset-quality review and balance-sheet assessments will be done by the ECB, by the national supervisors, by third-party supervisors -- in other words, we do expect collaboration from other member countries’ supervisors -- and by private-sector, independent consultants,” Draghi said.

Asked if this is a requirement for all member states, Draghi said “Yes, indeed.”

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